Episode Details

Good morning to you,

Sunday’s piece on the inexorable rise of the far right and what to do about it has struck quite a few nerves. Check it out here, if you haven’t already.

In today’s piece - considerably less political - which was first published in Moneyweek last Friday, we consider the sorry state of junior mining.

Enjoy!

Dominic

Mining is infamously cyclical. But if ever there was an industry that blows desert hot and arctic cold, it is the subsector of small cap and early-stage companies known as junior miners. And boy has it been blowing cold.

Many of the old hands are saying this is the worst bear market they have ever known. Worse than the 2013-15, when junior mining had a near-death experience, following the boom of the 2000s; worse than the bear market of the 1990s that came with colossally depressed metals prices at the end of a 20-year bear market and then the Bre-X scandal. 

Bre-X was one of the scams of the century. The Canadian gold mining company falsified gold samples from its mine in the middle of nowhere in Indonesia. The stock went up over 1,000-fold, from pennies to a C$6 billion valuation, before the fraud was exposed. Many were defrauded and the sector went into a prolonged depression, starving it of capital. The story became the basis for the film, Gold, starring Matthew McConaughey.

Mining needs capital. It typically takes more than 15 years to take a mine from discovery to production. That’s 15 years of drilling, development and mine building with no chance profit in sight - unless you sell your deposit to someone else who then has to find the capital to take it into production. Millions, sometimes billions of dollars are needed. There is no immediate return, there is no guaranteed return. Why invest in something with such long time horizons when you can invest in some tech play that will have its app uploaded to the app store, potentially generating revenue in a matter of months? The gains are quicker and the aggro is lower.

A lot can happen in those 15 years developing a mine. The metals markets can change, from supply shortages sending prices higher to glut sending prices lower. The money markets can change - interest rates can go up, for example. The political situation can change - politicians might seize strategic assets or impose windfall taxes, anti-mining lobby groups might block development, ESG narratives might take hold and prevent progress. It might be that after 10 years of drilling you discover the deposit is not quite as economic as you once hoped.

The Cycle Turns

Mining is hard. Many walk away. Then there’s no capital in the sector. With no capital, there’s no new metal supply coming to market. Then there’s a shortage of metal. Then, suddenly, we need to invest. Then capital floods the sector. It all starts to look rosy again. People make lots of money. Projects that will never make it to production start to get financed. Investors start to lose money. Rinse and repeat.

With Vladimir Putin’s invasion of Ukraine in 2022, commodities prices sky-rocketed. Supply chains were disrupted. Russian natural resources - and there are a lot of them - were now effectively off-line to the west. Nickel was probably the poster-child of the parabola. It suddenly spiked from around $17,000 to $100,000. The London Metals Exchange had never seen anything like it. Monday March 7th, 2022, was the date. That was the peak of the market. A bear market took hold. It has left the eyes of anyone invested in the sector bleeding. 

It doesn’t matter if the metal being mined is base or precious, strategic